US Regulator Issues Guidance for Cryptocurrency Derivatives Contracts

The U.S. Commodity Futures Trading Commission (CFTC) has published new guidance to exchanges and clearing houses for cryptocurrency derivatives listings. The move was long awaited by the trading industry amid concerns over the vetting process for new contracts.

CFTC Publishes Rules for Cryptocurrency Derivatives Contracts

The advisory from the CFTC, headed by Amir Zaidi, director of the Division of Market Oversight (DMO), said exchanges wanting to launch cryptocurrency derivative contracts must be able to monitor underlying cryptocurrency spot markets, as well as having a plan for coordinating with federal regulators, and reach out to market participants to solicit comments on a pending contract launch, according to the Wall Street Journal.

“The CFTC staff is committed to providing regulatory clarity as much as possible. As the virtual currency market continues to evolve, CFTC staff will seek to provide additional guidance to help market participants keep pace with innovation while complying with CFTC regulations.”

Brian Bussey, director of Divisions of Clearing and Risk (DCR), further explained the importance of the new guidance issued by the U.S. financial watchdog.

“CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products. In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

The first bitcoin futures contracts were issued in December 2018 and triggered the most exhilarating rally ever in the cryptocurrency market, pushing Bitcoin to its all-time highs at the $20,000 area. Volatility in the digital currency space, concerns over lack of transparency by some trading platforms, and a number of hacking episodes, have led the Futures Industry Association (FIA) to call for a hard stance on cryptocurrency derivatives by the CFTC.

The new guidance points out that in order to list a new virtual currency derivatives contract, exchanges and clearing houses must provide enhanced market surveillance, close coordination with CFTC staff, large trader reporting, outreach to member and market participants, and derivatives clearing organization (DCO) risk management and governance.

The CFTC decided that Bitcoin et al. were to be considered commodities, from a regulatory standpoint, in 2015. As commodities, cryptocurrencies fall under the oversight of that regulator, which has taken action against unregistered Bitcoin futures exchanges since then. Additionally, the CFTC has proposed guidance on what is a derivative market and what is a spot market in the virtual currency context, and has warned about valuations and volatility as well as wash trading and prearranged trades.

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